2005 (12) TMI 455 - AT - Income Tax

Summary

Issues Involved:
1. Denial of deduction under section 10A.
2. Assessment of income chargeable to tax.
3. Contravention of Article 26 of the Avoidance of Double Taxation and Prevention of Fiscal Evasion Treaty.
4. Levy of interest under sections 234A, 234B, and 234C.

Detailed Analysis:

1. Denial of Deduction under Section 10A:
The assessee, a branch of a U.S. company, claimed exemption under section 10A for the export of software. The Assessing Officer (AO) denied this exemption on the grounds that the software was transferred to the Head Office (HO) and not to any third party, which did not constitute an export. The AO argued that profits could not be earned from oneself and that the transfer to the HO did not meet the definition of export. The assessee contended that section 10A is a tax holiday provision based on the location of the industrial undertaking and that all procedural requirements, including receiving convertible foreign exchange, were met.

2. Assessment of Income Chargeable to Tax:
The AO estimated the taxable income at Rs. 6,64,57,670, arguing that the global accounts indicated a gross profit almost four times the cost incurred. The CIT (Appeals) partially agreed but reduced the income to Rs. 4,98,43,260, attributing 75% of net profit to the Permanent Establishment (PE) in India. The assessee argued that the AO's estimation was baseless and that the actual operations in India were not comparable to those in the USA. The CIT (Appeals) held that the Indian Undertaking was a PE of the U.S. company and that the income should be computed according to Article 7 of the DTAA.

3. Contravention of Article 26 of the Avoidance of Double Taxation and Prevention of Fiscal Evasion Treaty:
The assessee argued that under Article 26, the tax treatment of a U.S. resident in India should not be more burdensome than that of an Indian resident in a similar situation. The assessee claimed that it met all substantial requirements of section 10A and should not be disqualified for being a branch rather than a subsidiary.

4. Levy of Interest under Sections 234A, 234B, and 234C:
The judgment did not provide detailed arguments or a separate analysis on the levy of interest under sections 234A, 234B, and 234C, suggesting that this issue was not the primary focus of the appeal.

Conclusion:
The Tribunal found that the primary issue was the determination of profits attributable to the PE in India under Article 7 of the DTAA. The case was remanded to the AO for a fresh determination of profits on an arm's length basis, considering the independent nature of the PE. The Tribunal did not comment on the availability of deduction under section 10A, emphasizing that this could only be considered after determining the correct profits attributable to the PE. The appeal was treated as partly allowed for statistical purposes.